Bond Scam Uncovered in 2010 Apparently Resurfaces

April 23, 2013 Leave a comment

04.22.2013 15:28

Bond Scam Uncovered in 2010 Apparently Resurfaces

Police arrest prominent financial executives for allegedly trading in inter-bank market through a type of account abused three years ago

By staff reporter Zhang Yuzhe

(Beijing) – Financial regulators have closed in on a number of suspects who apparently cheated in the bond market using a method that came to light in late 2010.

Police have arrested a number of prominent financial executives, including Yang Hui, managing director of the fixed-income department at CITIC Securities, China’s largest securities firm.

The scandal has attracted the attention of the highest levels of government. Vice Premier Wang Qishan, head of the Communist Party’s Central Discipline Inspection Commission, has told regulators to investigate all cases and punish the perpetrators.

The rule breakers were apparently using a tactic that involved a regulatory loophole in the bond market. The loophole was exposed by a 2010 investigation into Zhang Rui, then an official in the Ministry of Finance’s Department of Exchequer.Zhang was found guilty of illegally trading bonds through Class C accounts, which are registered with the China Government Securities Depository Trust & Clearing Co. Ltd. and used by non-financial institutions and legal persons to trade bonds in the inter-bank market.

He was initially caught sending text message to traders, tipping them off about the price of government bonds before auctions started. Zhang was taken in for questioning by the party’s discipline watchdog in December 2010 and later handed to the courts. Investigators found that he made more than 40 million yuan in illegal gains, including 6 million yuan in bribes from the company that printed the government bonds.

Zhang was convicted of those crimes in a closed-door trial last year and sentenced to life in prison, sources close to the ministry said.

His case brought the central government’s attention to Class C accounts, which were loosely monitored and regulated. A series of measures have been taken since then to attempt to control retail investors’ access to the accounts and make it harder for the account holders to take advantage of bank resources for personal gain.

Zhang and his wife set up an investment company to trade bonds, including short-term bonds and medium-term notes through Class C accounts, a source with knowledge of the matter said.

The couple “secretly divorced a long time before but no one in the Ministry of Finance knew because they continued appearing at various occasions as a couple,” a source close to the ministry said. He added that they divorced probably because it was easier to hide assets.

Zhang started at the Department of Exchequer in 1997. Starting the next year, he was in charge of the issuance and redemption of government bonds.
The full story of the crackdown on illegal bond trading through Class C accounts will be published soon.

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